KUCHING: With the growing trend of multi-level marketing (MLM) business amidst a weakening consumer sentiment, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) believes that their heavy incentive programs may be relatively more rewarding to distributors than share holders.

As such, the research arm forecasts that the MLM sector is neutral with a slightly positive bias.

This forecast comes following meetings with Malaysian MLM giants Amway Malaysia Holdings Bhd (Amway) and Hai-O Enterprise Bhd (Haio) separately.

“We gathered that several factors are driving and sustaining the interest in MLM, including the accommodative product strategy and new launches, rewarding incentive systems and the modernisation of networking,” observed the research arm.

While rewarding incentive systems is likely to provide overwhelming motivation to distributors, it would also likely become a costly obligation for MLM companies to bear.

“Thus, it might be a double-edged sword as the distributor growth or productivity might fall if the attractive rewarding systems failed to be improved or sustained,” explained the research arm.

From a company perspective, the research arm has decided to maintain its underperform rating on Amway with an unchanged target price of RM8.04 based, based on 19 fold price earnings ratio (PER) of financial year 2017 (FY17).

This is mostly due to Amway’s plunging net profit of 48.5 per cent despite a healthy 12.7 per cent growth in revenue mainly due to heavy investment in centive and marketing programs.

The research arm notes that Amyway’s management is guiding for a challenging second half of 2016 (2H16) in the view of weak consumer sentiments, higher product costs and the continuous commitment in incentivising distributors.

“Thus, we are forecasting its net profit to record second consecutive decline in FY16 and dividend yield is expected to diminish in line with the weaker profit,” the research arm justified.

As for Haoi, the research arm has decided to maintain their rating of market perform with an upgraded target price of RM3.25 from RM2.85 per share.

Justification for this lies in the exciting growth in the Haio’s MLM division where a huge increase in distributor base was experienced due to a successful transformation in business strategy.

Haoi’s FY16 revenue and operating profit recorded growths of 46.6 per cent and 25.8 per cent, respectively.

“We understand that the positive momentum has been sustained into FY17 with the Group allocating capital expenditure (capex) of RM10 million to set up more branches to meet demand,” said the research arm.

Additionally, Haio’s is anticipating a soft outlook of their other operating division wholesale and retail, due to potential negative economy headwinds.

As such, Haoi remains the research arms preferred pick of the sector for its healthy earnings growth supported by the MLM division and attractive dividend yield of over 5 per cent on the back of a generous pay out ratio and relatively model PER valuations as compared to Amway.